Reference no: EM132576007

Question 1: Lubbock Oil Co. incurred $250,000 in drilling costs prior to deciding whether to complete the well. The company estimates that the completion costs are $120,000 and the discounted future net cash flows from the sale of the oil and gas from this well is expected to be $200,000.

a)The company will have a loss of $170,000 in total for this well if the well is completed.

b)The company should not complete the well.

c)The company will have a gain of $80,000 in total for this well if this well is completed.

d)The company should complete the well only if the discounted future net cash flows from the sale of the oil and gas from the well is $370,000.

Question 2: According to the SEC, a company is NOT allowed to disclose:

a)proved reserves.

b)probably reserves.

c)prospective reserves.

d)possible reserves.

Question 3: Sioux Petroleum Co., a successful efforts company, drilled a dry exploratory well at the cost of $150,000. Later, the company drilled another exploratory well on the same property at the cost of $200,000 and it was successful. Sioux Petroleum Co. should:

a)expense $200,000.

b)expense $350,000.

c)expense $150,000.

d)capitalize $350,000.

Question 4: Hansel Energy Co. signed a dry-hole contribution agreement with Gretel Oil Inc. According to the agreement, Hansel Energy Co. may have to pay $10,000 to Gretel Oil Inc. As a result of the drilling, the well is successful to find commercially producible reserves. Hansel Energy Co. has to pay Gretel Oil Inc.:

a)$0.

b)$5,000.

c)$10,000.

d)None of the above.